Making Your Money Last

Early Retirement Means Finding Health Insurance Before Medicare

Cover the gap with health insurance before you're eligible for Medicare enrollment.

The health and economic crisis is triggering a wave of early retirements as some older Americans are laid off or decide that the risk of catching COVID-19 at work isn’t worth staying on the job. 

An unexpected retirement brings plenty of financial headaches, and one of the biggest is finding affordable health insurance until you turn 65 and can qualify for Medicare. If you’re in this situation or suspect a layoff is coming, there are ways to bridge the health coverage gap long enough to reach the Medicare finish line, but each has its pros and cons, including whether any pre-existing health conditions are covered. 

Tap Retiree Health Benefits Before Medicare Eligibility

Although it’s a disappearing perk, 28% of large companies, according to a 2019 Kaiser Family Foundation survey, still offer retiree health benefits to former employees. If your employer is among them, you may be able to remain on the company’s group health plan with no interruption in coverage. The retiree health plan will serve as your primary insurance, covering pre-existing conditions, until you’re eligible for Medicare, when the plan will function as secondary insurance to supplement Medicare. 

Don’t assume your retiree health benefits are the same ones you received as an employee, cautions Steve Parrish, co-director of the Center for Retirement Income at the American College of Financial Services. “Employers may offer a different program with fewer benefits or with a higher premium for their retirees versus their employees.”

He also suggests studying the company’s rules to see if you qualify. “How do they define retiring versus quitting, and does it matter for health insurance? For example, if you give two weeks’ notice, does it count as quitting and you’ll lose coverage, whereas if you give a month’s notice you can retire?” When in doubt, ask your HR department how it works. 

COBRA Is an Option Prior to Medicare Sign-Up

The Consolidated Omnibus Budget Reconciliation Act is another way to retain health insurance (and coverage for pre-existing conditions) through a former employer. Businesses with 20 or more employees must comply with the law, but you’ll pay up to 102% of the cost (premium plus administration fee). 

Ordinarily, COBRA only lasts for 18 months, but these aren’t ordinary times. Legislation passed last March temporarily extended COBRA coverage until 60 days after the national emergency ends.  “This has created a confusing situation. Has the national emergency ended yet? I wouldn’t say so,” says Parrish. “COBRA coverage could extend beyond the usual 18-month window, depending on future government pronouncements, though how this will work remains unclear.” 

Utilize State or Federal Health Exchanges Before You're Eligible for Medicare

The Affordable Care Act, which established the health exchanges, was designed for individual health coverage and requires that all plans sold through the exchanges cover pre-existing conditions. The ACA has an annual open enrollment, which in 2020 falls between Nov. 1 and Dec. 15, but if you leave or lose your job at any other time of year, you have 60 days from that point to sign up for health insurance during a special enrollment period. 

To apply for coverage, go to Healthcare.gov or your state’s health insurance exchange. ACA plans vary depending on the premium, provider network and out-of-pocket costs, such as deductibles and copayments. The plans are categorized by color: bronze, silver, gold and platinum, with higher premiums and lower out-of-pocket costs as you move up the color scale.

“The premiums for ACA plans are age-based, so for those above 60, they aren’t cheap,” says Nancy Damato, director of group benefits for consulting firm RDA Benefits Services in Marlton, N.J. The rates vary by location. For example, Damato says, a 62-year-old man in southern New Jersey would pay $690 a month for a health plan with a $3,450 annual deductible and a more restricted provider network, or as much as $1,940 a month, with a $1,500 annual deductible, for a plan with a wider network including some out-of-state doctors. 

Depending on your income and household size, you may be eligible for government subsidies to reduce premiums or out-of-pocket expenses. In 2020, a two-person household qualifies if their income is between $17,240 and $68,960. The lower your income, the more support you receive. To apply for the subsidy, you will need to estimate your 2020 income and back it up with documents, such as a final pay stub from a previous job, Social Security benefits letter, pension statement or the previous year’s tax return. 

All ACA plans cover preventive and wellness care 100%, without charging the deductible, Damato says. “Physicals, mammograms, routine bloodwork and routine colonoscopies, these would all be covered without an out-of-pocket fee. If you’re in good health, it may make sense to get a high-deductible ACA plan with lower premiums until Medicare.” 

A Spouse's Workplace Coverage May Cover You Before Medicare Signup

You also may be eligible to join a working spouse’s workplace plan. Although they aren’t required to do so, some employer-provided health plans will cover an employee’s family members.  Losing your own coverage qualifies for special enrollment outside the company’s usual open enrollment window. The costs, though, may not be the same as your spouse’s because employers don’t have to contribute anything toward a family member’s coverage. 

Short-Term Health Insurance May Fill the Medicare Gap

If you’re healthy and your 65th birthday is just around the corner, a short-term plan may be enough to fill the gap until you’re eligible for Medicare. Short-term health insurance lasts from a few months to just under a year at most, depending on the state. The plans typically charge lower premiums than the ACA if you’re in good health, but there are big downsides.

“Short-term health insurance plans include health underwriting,” Damato says. “They would not cover pre-existing conditions, and you could be denied for health reasons. They are also not ACA-compliant so

if your state charges a tax penalty for not having minimum essential coverage, you would still owe it even after buying short-term health insurance.”

These plans also can restrict renewals. At the end of the short-term coverage, the company may prevent you from renewing for at least a year. 

As you weigh your options, you may want to speak with a trained health insurance agent, broker or financial adviser. “One advantage of meeting with a broker is that they can sell all the plans in your area; they aren’t representing just one insurance company,” says Damato. To find a local agent or broker, use the National Association of Health Underwriters’ online search tool.

Because financial planners consider a client’s entire financial situation, they may spot ways to make healthcare more affordable. That’s what Tyler Lerman, a certified financial planner in York, Pa., recently did for his clients, a married couple, both age 62, who were retiring early. “We went over their budget and savings,” he says. “From there, we concluded that their best strategy was to delay collecting Social Security and to structure their investments so they would temporarily reduce taxable income. After doing so, they qualified for a tax credit for their ACA plans.”

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